The Fed Blog

Thursday, December 11, 2014

Zombies in China (excerpt)

In the 11/17 Morning Briefing titled “The Great Deflators,” I wrote about zombies: “In their effort to moderate the business cycle, central bankers have a tendency to keep zombies alive. These are the ‘walking dead’ business borrowers, who borrowed too much and are hemorrhaging cash. They need to die and should be buried. Instead, easy money keeps them in business, allowing them to continue producing more with their excess and unprofitable capacity. Today, China is full of zombies. There are plenty in the global mining industries.

“If you look hard enough, you’ll find zombies just about everywhere. It certainly would be easier to spot them if central banks started to tighten their monetary policies. That might explain why central banks aren’t likely to do so. Deflation may be the most telling sign of the zombie problem. By fighting deflation, the central banks are keeping the zombies alive!”

On November 21, the People's Bank of China (PBOC) cut its benchmark one-year loan interest rate to 5.6% from 6.0% and cut its benchmark one-year deposit rate to 2.75% from 3.00%. The nation's central bank also hiked the upper limit on deposit interest rates to 1.2 times the benchmark rate from 1.1 times the benchmark rate. The bank said it took the unexpected actions, which were the first such changes since July 2012, in response to expensive borrowing costs rather than any direct worries about the economy's slowdown.

Who are they kidding? Obviously, the PBOC is worried about slowing growth and persistent deflation. However, there they go again keeping zombies alive. They also triggered a mini-bubble in the stock market, as I discussed yesterday.

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ABOUT: Dr. Ed Yardeni is the President and Chief Investment Strategist of Yardeni Research, Inc., a provider of independent investment strategy and economics research. This blog highlights excerpts from our research service, which is designed for investment and business professionals.

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